Becker to NCUA: Examiners Applying Opinion to IRR Management

NAFCU President/CEO Fred Becker has fired off a letter to the NCUA Board urging the regulator to take immediate action regarding examiners using their own opinions and methods when shock testing credit union balance sheets for interest rate risk.

“They’re substituting their own opinions for those of the management of the credit union, as well as the expert advice they are getting from very well-qualified third parties,” Becker said of the feedback NAFCU has received from its members. “The examiner is not responsible for running the credit union. That’s for the board and management to do.”

Becker said he’s heard reports of examiners shock testing for interest rate risk under “absurd” scenarios, such as unrealistic increases in rates over a six-month period.

“We’re taking about things that just aren’t realistic,” he told Credit Union Times. “One in a million chance testing.”

Specifically, Becker said in the letter he sent Friday that members have reported examiners requiring credit unions to set policies according to rate shocks outlined in a 16-year-old core deposit study.

“The examiners then suggested the members initiate drastic balance sheet restructuring that would necessitate selling large portions of the long-term (three years or longer) investments and long-term (five years or longer) loans and shift those dollars into very short term and/or floating-rate loan and investment products without regard to current economic forecasts that expect rates to remain at current low levels for another one to three years,” Becker said in the letter.

To do so, many credit unions would have to curtail their long term lending and much of their member business lending, he said. Shifting assets this way into very short term products would drastically reduce net interest margins, thereby reducing net income and the member’s net worth, which Becker said would seem to be counter-productive to the overall goals of the NCUA.

Instead, he said, credit unions should have the flexibility to determine appropriate testing and modeling based on industry-accepted standards and expert advice from qualified third-party vendors.

And, NAFCU suggests the NCUA provide clearer interest rate risk guidance to examiners, emphasizing that each credit union’s situation is unique, and the models, assumptions and testing it employs should be commensurate with its portfolio.